Repo Services

Repurchase agreements are financial transactions that involve the sale of a security and the subsequent repurchase of the same security. Hence the name “repurchase agreement” (or repo, for short).

Repos are typically short-term transactions—usually overnight—but they can extend out as far as two years. They enable broker/dealers, banks and other market participants to sell securities in order to obtain immediate funds for their own accounts, or for the benefit of their clients. They likewise enable the buyers of the securities to earn short-term interest on their funds. In effect, the securities function as collateral for short-term loans.

DTCC’s Fixed Income Clearing Corporation (FICC), through its Government Securities Division (GSD), matches and nets repo transactions as part of its netting process for other government securities trading activity, including all buy/sell transactions and U.S. Treasury auction purchases. Since the Repurchase Agreements Service was introduced in 1995, it has rapidly outpaced all other products and accounts for the largest dollar volume of U.S. Government securities trades processed through FICC. Today, on average, FICC matches, nets, settles and risk manages repo transactions valued at more than $1.7 trillion a day, bringing substantial cost-reduction benefits to its netting members and reducing positions requiring delivery by as much as 75%.

As a secured form of financing, repos offer dealers and other market participants more favorable terms than traditional money market cash lending transactions. Reverse repurchase agreements are used by institutions to earn income on their excess cash reserves. When the securities are sold, the sellers simultaneously agree to repurchase the securities on a specified day at a given price, including interest calculated using a rate agreed upon at the time the sale takes place. The portion of the repo transaction when the security is sold is referred to as the “start” leg, while the subsequent repurchase is called the “close” leg. The borrower, and therefore the person providing the collateral, is called the “repo dealer”; the cash provider is called the “reverse dealer” or “lender.” Except for a forward start repo, the “start leg” of the typical repo will settle as a normal transaction. The “close leg” will be part of the netting process on the respective settlement date.

Who Can Use this Service

FICC’s GSD comparison members can participate in the Repo Comparison Service, and GSD netting members can participate in the Netting and Settlement Service for repos. Access to both services is also available to non-GSD members through GSD’s Executing Firm feature. It permits current GSD netting members, when they function as “introducing members,” to submit trades on behalf of non-FICC members, such as institutions and correspondent firms.

Benefits

By submitting repo trades to GSD for matching, comparison, netting and settlement, participants derive a full range of benefits, including:

Minimized Risk Through Guaranteed Settlement—By acting as the common counterparty to all repos that enter its netting system, FICC guarantees settlement for both participants of the transaction.

Reduced Capital Requirements Through Balance Sheet Offsets—FICC’s netting and settlement procedures for repos facilitate the ability of members to maximize the availability, per the requirements set forth in FASB Interpretation No. 41, of balance sheet netting.

Automated Coupon Tracking—FICC passes the coupon payment from the holder of a security (reverse participant) to the funds borrower (repo participant) when the repo term crosses coupon payment date.

Reduction in Securities Transfer Activity—As a result of netting, the total daily settlement obligations of participants are substantially lowered. Fewer Fedwire movements translate into reduced costs for securities transfers, less participant exposure to daylight overdraft charges, and less risk from operational failure.

Complete Audit Trail and Automated Reporting—A detailed report of all repos submitted to FICC’s Real-Time Trade Matching (RTTM®) system by participants is available as interactive output, and an Internet User Interface is being developed for GSD activity.

Through its trade guarantee, FICC guarantees that participants will receive their repo collateral back at the close of the repo transaction, while reverse participants will receive the start amount paid at the repo’s inception, plus interest. Trade details for the start and close legs are submitted as a single transaction, reducing errors and improving efficiency.

How the Service Works

Participants execute repos with valid repo netting members of FICC’s GSD and then submit them via the RTTM system for matching, comparison, risk management and, ultimately, net settlement. GSD supports the submission of the following types of repos:

Overnight—Repos that start today with a close date of the following business day

Term—Repos that start today with a close date of more than one business day but up to two years in the future

Forward-Starting—Repos that have a start date of one or more business days greater than the trade date.

Repo-to-Maturity—Repos in which the repo close date is the same as or later than the maturity date of the underlying security

General Collateral Finance Repurchase Agreement (GCF Repo®)—GCF Repos allow dealers to trade general collateral repos, based on rate and term, throughout the day on a blind-brokered basis. See GCF Repo Factsheet for more information. (Insert link to GCF Factsheet)

The GSD also supports the ability to substitute securities used as collateral in a term repo currently on the books of the GSD. Participants submit details regarding the substitution on their RTTM input, and send collateral substitution requests using an automated facility. (See “Repo Collateral Substitution Service”).